☁️Sky High Returns? Inside the First Trust Cloud Computing ETF (SKYY)

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Few technological advancements have reshaped our world as profoundly as cloud computing in today's digital landscape. As businesses and consumers increasingly migrate to cloud solutions, savvy investors want to capitalise on this trend. The First Trust Cloud Computing ETF $SKYY ( ▲ 1.3% ) offers targeted exposure to companies driving the cloud revolution.

In this edition of ETF UNO, we will explore SKYY's composition, investment strategy, historical performance, and reasons to consider it for your portfolio while also discussing potential drawbacks.

Whether you're new to thematic ETF investing or want to enhance your tech allocation, this analysis will help you understand the value of cloud computing in your investment strategy. Let's dive into SKYY and see why it could be a valuable addition to your portfolio.

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What is SKYY?

Launched in July 2011, SKYY provides investors with targeted exposure to the cloud computing industry. Managed by First Trust, known for its expertise in thematic ETFs, SKYY tracks the ISE CTA Cloud Computing Index, an equal-weighted index that reflects the performance of companies in the cloud computing sector.

This ETF focuses on businesses that derive significant revenue from cloud-related activities, allowing investors to capitalise on one of the most transformative technological developments of the 21st century.

Cloud computing delivers computing services—like servers, storage, and software—over the Internet ("the cloud"). This allows organisations to access resources as needed, promoting faster innovation and cost efficiencies without the need to maintain physical data centres. This model represents a fundamental shift in how computing power is delivered and consumed, offering several key advantages:

1. Scalability: Organisations can rapidly scale their IT resources up or down based on business needs without significant capital expenditure.

2. Cost Efficiency: Cloud computing converts large capital expenses for hardware and software into operational expenses, often reducing total IT costs.

3. Accessibility: Cloud-based applications and data can be accessed from anywhere with an internet connection, enabling remote work and global collaboration.

4. Innovation Acceleration: By removing infrastructure constraints, companies can rapidly test and deploy new ideas without lengthy hardware procurement cycles.

5. Reliability: Major cloud providers typically offer redundant systems across multiple geographic locations, ensuring higher uptime and disaster recovery capabilities.

Cloud computing has become the foundation for nearly every major technological innovation of the past decade. Consider these examples:

• 🤖Artificial Intelligence and Machine Learning: Cloud platforms provide the computational resources needed for AI development, making advanced capabilities accessible to organisations of all sizes.

• 🌐Internet of Things (IoT): Billions of connected IoT devices rely on cloud infrastructure to process and analyse the data they generate.

• 🚀Digital Transformation: Companies in digital transformation use cloud platforms to modernise legacy systems and enhance customer experiences.

• 📊Big Data Analytics: Cloud storage and processing of large datasets enable companies to gain valuable insights from their data.

• 💻Software Development: Modern software development, including DevOps and microservices, focuses on cloud-native approaches.

Research shows that global spending on public cloud services is growing annually at double-digit rates, with estimates predicting the market could surpass $1 trillion by 2028. This growth highlights the cloud's role as a major technological shift in IT resource delivery and consumption across industries.

SKYY typically holds between 60-70 companies, with a modified equal-weight methodology that prevents any single stock from dominating the portfolio. This approach diversifies while maintaining focused exposure to the cloud computing theme.

Investment Strategy📈

For investors looking to add cloud computing exposure to their portfolios, SKYY offers a specialised vehicle that can complement broader technology holdings or serve as a core thematic position. Here are several strategies for effectively incorporating SKYY into your investment approach:

• 🧩Thematic Overlay to Core Holdings: A simple strategy is to use SKYY as an overlay on a core portfolio of broad-market ETFs. This allows you to maintain market exposure while tapping into cloud computing growth. With a small allocation to SKYY, your overall portfolio won't be overly affected by cloud stocks, but you'll still gain if the sector performs well.

• 👩‍💻Technology Sector Refinement: For investors with a tech allocation, SKYY can enhance their exposure to cloud computing. This strategy allows them to capitalise on growth in the broader tech sector while focusing specifically on the cloud subsector.

• 💹Growth-Oriented Portfolio Component: For more aggressive growth portfolios, SKYY can serve as a significant component:

  • Growth core: 50-60% to growth-oriented broad market ETFs

  • Thematic growth drivers: 20-30% divided among 3-5 thematic ETFs, with SKYY representing 5-10% of the total portfolio

• 🏋️Barbell Approach with Defensive ETFs: Some investors use a barbell strategy that pairs high-growth thematic ETFs with more defensive investments. This allows them to pursue the growth potential of cloud computing while balancing portfolio risk with stable, income-generating assets.

The appropriate allocation to SKYY should also consider your investment timeline:

• Short-term (1-3 years): Limited allocation (0-5%) due to potential volatility

• Medium-term (3-7 years): Moderate allocation (5-10%) as part of a diversified growth strategy

• Long-term (7+ years): Potentially larger allocation (10-15%) for investors with strong conviction in the cloud computing growth thesis

SKYY at a glance

ETF Issuer: First Trust

Inception: 2011-07-05

Asset Class: Equity

Underlying Index: ISE CTA Cloud Computing Index

Geographical Focus: U.S.

Expense Ratio: 0.60% (as of last data point)

Dividend Yield: N/A

Distribution Frequency: N/A

Historical Performance

Since its launch in July 2011, the SKYY ETF has delivered impressive returns, albeit with significant volatility typical of tech investments.

• Long-Term Focus Pays Off: SKYY's best returns have come over longer periods, suggesting a multi-year investment approach.

• Higher Volatility: SKYY has historically been about 20-30% more volatile than the S&P 500, reflecting the growth nature of cloud computing companies.

• Interest Rate Sensitivity: Like other growth-focused investments, SKYY's performance is sensitive to interest rate changes, with rising rates often leading to underperformance.

• Resilience in Technology Cycles: Despite major downturns in the tech sector, SKYY has demonstrated a strong ability to recover, supported by the ongoing growth of cloud computing.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Exposure to a Secular Growth Trend with Robust Runway: Cloud computing is a major technological transformation with promising growth prospects. Current research indicates we are still in the early stages, with projections suggesting the global market could grow at a compound annual growth rate (CAGR) of 14-16% through 2030, potentially reaching $2 trillion. SKYY provides investors a chance to capitalise on this growth across the cloud ecosystem.

2. Essential Infrastructure for AI Revolution: The rise of artificial intelligence (AI) has strengthened the investment case for cloud computing. As AI adoption increases, so will the demand for cloud resources. SKYY offers investors exposure to both infrastructure providers enabling AI development and software companies enhancing their cloud services with AI.

3. Defensive Characteristics Within Technology Sector: Cloud computing companies, although part of the growth-oriented technology sector, often show resilience during economic uncertainties, outperforming other tech segments in tough times. SKYY’s portfolio, featuring both established leaders and innovative growth firms, provides a more balanced risk profile than many other technology thematic ETFs.

Top 3 Reasons Not to Invest

1. Valuation Considerations and Interest Rate Sensitivity: Cloud computing companies typically have higher valuations than the broader market. These growth stocks are more vulnerable to rising interest rates, which lower the present value of future earnings. During the 2022 rate hike cycle, SKYY significantly underperformed the market.

2. Competitive Intensity and Margin Pressures: The cloud computing industry is becoming increasingly competitive, which could affect long-term profitability. While the market is growing rapidly, companies in SKYY's portfolio may face challenges, leading to varied performance among its holdings.

3. Limited Geographic Diversification: SKYY's holdings are comprised of U.S.-based companies, leading to limited exposure in international cloud computing markets, especially in rapidly growing regions like Asia.

Unlocking the Potential of the SKYY ETF 🚀

The First Trust Cloud Computing ETF provides investors with focused exposure to one of the most transformative technological advancements of our time. Throughout this analysis, we have seen how cloud computing has progressed from an emerging technology to a fundamental infrastructure that supports almost every facet of our digital lives—from streaming entertainment and social media to enterprise software and innovative AI applications.

Remember that SKYY is most effective when included as part of a diversified portfolio strategy rather than being held as a standalone investment. Evaluate how it complements your current holdings and aligns with your investment objectives and risk tolerance.

At ETF UNO, we are dedicated to helping you navigate the changing landscape of thematic ETF investing. We invite you to join our community discussions to share your thoughts on cloud computing investments and gain insights from the experiences of fellow investors with SKYY and similar thematic ETFs.

DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.